In the community where I live, there are two brothers who are successful businessmen. One day, one of their employees got frustrated with their attitude toward their finances. He complained to me, using the following joke as an illustration: “How do you make copper wire?” When I didn’t give a satisfactory answer, he said, “You throw a penny on the ground and let these two brothers pull on each end.” Although he meant it to be demeaning, I took it as a compliment and wished someone would tell that joke about me.
Now, you don’t want to stretch every penny into copper wire. There is a difference between being frugal and being downright cheap. Frugality means living within your budget and being realistic in what you can spend; cheapness means buying poor-quality ingredients for low prices while expecting to produce a high-quality item. It doesn’t work. Don’t even go there.
Often, people end up cheap because of extravagance in other areas. Some rent expensive office space but skimp on salaries. I have a simple tip for keeping things under control: never buy inessential things with money that you do not have. That way, you’re more likely to have the money there for the things you absolutely need to take care of, such as bills, payroll, and equipment.
While you should be frugal in your business, be sure to treat your employees as well as you can. Don’t overspend, there, either, but you cannot let employees take second place, especially when they see you spending company money on nonessentials that benefit you and not them. Some entrepreneurs try to cut dangerous corners. Skimping on essentials or not fulfilling contracts is a surefire road to disaster. As important as it is to be frugal, it’s more important to be honest and keep your word.
Setting up an office is a very encouraging, “feelgood” part of starting your business. Developing your workspace, whether it’s a rental suite or a basement, is part of acting big. You need to be able to “go to work.” But be careful! It’s a lot easier to order nice office furniture and a thousand “Post-Its” than it is to get on the phone and get your product or service into the market. Let your frugality keep you in check, and never, ever forget this: don’t substitute the joy of accomplishing something with the thrill of buying something.
You’re not creating an office; you’re building a business. Your passion and devotion to your venture should carry you through, regardless of your locale or the style of your desk. When bootstrapping, your funds are your best friend. Think about the needs of your business. Before you invest in nice furniture and expensive office space, think: can I hire employees to make use of the space I currently have? Wait a bit and make sure you have some cash coming in before you make any big changes.
Several years ago, a business acquaintance of Ron’s started a health services business based on a revolutionary piece of equipment. She made proper financial and use arrangements with the patent holder of the equipment, hoping to help people and make some money. Things should have gone well. However, the equipment was extremely expensive.
In order to purchase a few of these machines, the business owner and her partner set about raising $2 million. Once the money was available for their use, the pair went and bought a whole bunch of office furniture and other accoutrements. They had no customers lined up to purchase the machines yet, but wanted their new, “triple-A” office space to look full and attractive. They knew the importance of acting big and felt they had to look like they really could compete with the other healthcare practitioners. Sadly, though, they had no idea how to behave small.
In addition to setting up shop in a high-rent business district, they filled each office with plush furniture, outfitted the lunch room with a professional, automated ping-pong table, bought the latest in computer equipment for each office, and—last but not least— purchased not one, but two airplanes. Airplanes? It was important for them to act big, sure, but behaving big in this fashion proved to be a disaster for everyone. No revenue in sight, no potential customers, no idea if insurance companies would approve their service—and they were buying airplanes. Their seedling company, the partners, the venture capitalist, and the bank all yook a nosedive. The two partners chewed up the $2 million before the business ever left the hangar.
It is important to give the perception that you are big enough to play the game; however, acting big should not be at the expense of your stewardship for the company’s resources. Some of the greatest successes pinch pennies, pay attention to details, and manage every resource in a scarcity mode.
Sam Walton, the founder of Wal-Mart, did exactly that. It is said that when he saw a penny on the street, of course he stooped over and picked it up. I love that story. You have to think that way. In the early stages of your company—really, in all stages of the company— you must create a fiscally conservative culture. Behave small by asking yourself, “Do I need it?” before you try taking off without any gas.
Porter’s Points—Do You Need It?
- Never confuse putting on the face of confidence, stability, and professionalism with bloating your company with unnecessary frills. Outside of your organization, act big. Inside, behave as small as possible.
- Don’t let your employees think you are cheap. Frugal and cheap are not the same thing.